Financial profit with less risk

Broadridge is unique in the financial sector. For over 40 years, the company has built up its investor-communications business and now dominates this niche industry. Its securities-clearing division makes short-term loans to brokers, which exposes it to some credit risk. But these loans are safer than subprime mortgages or credit-card debt. The company should also continue to profit as more banks and brokers look to outsource their routine transaction-processing tasks to save money. Moreover, it gains from the ongoing drop in computer costs.

The stock fell from $24 in late 2007 to a low of $9.21 last November, during the financial crisis. It has now recouped most of last year’s share-price decline. We feel it has more gains ahead.

The stock began trading on April 2, 2007, after former parent Automatic Data Processing Inc. (Nasdaq symbol ADP) distributed Broadridge shares to its own shareholders as a special dividend. Since it became a public company, Broadridge’s annual revenue has hovered around $2.15 billion. Earnings fell from $1.42 a share (or a total of $197.1 million) in 2007 to $1.36 a share (or $192.2 million) in 2008. Broadridge’s fiscal year ends on June 30.

In 2009, its earnings rose to $1.58 a share (or $223.3 million). If you disregard unusual items, including a gain on the early retirement of debt and a tax credit that lowered its effective income-tax rate, Broadridge’s earnings per share rose 6.3%, to $1.51 from $1.42. The improved earnings came despite difficult conditions in the financial sector.

Customers typically sign long-term contracts for Broadridge’s services. This gives it recurring revenues, as well as stable and predictable cash flows.

Broadridge gets about 70% of its revenue from its Investor Communication Solutions division, which sends proxy materials to stock and mutual-fund investors, then counts the votes. The division distributes over a billion pieces of investor communication each year, and processes over 70% of all U.S. proxy votes.

The Security and Exchange Commission (SEC) now lets companies post their annual reports and other documents on their web sites instead of mailing them. However, companies must still mail letters telling shareholders that these documents have been uploaded to their sites.

Adjusting to online reporting

More companies are switching to this “notice and access” process, since it lowers their printing and postage costs. As a result, Broadridge is now handling fewer documents. This, in turn, has hurt its revenue.

However, Broadridge provides electronic-delivery services on behalf of its customers, and helps them comply with SEC regulations, so it stands to gain from this trend over the long term. It also helps its clients conduct online meetings and forums. These make it easier for companies to keep shareholders informed, and encourages them to participate in annual meetings.

Broadridge gets 25% of its revenue from its Securities Processing Solutions division, which provides real-time transaction-processing services that automate many routine functions. These include capturing and executing orders, confirming trades, settling transactions and accounting.

The Securities Processing division’s revenue rose 4% in 2009. That’s because Broadridge was able to attract new clients and sell more services to its existing ones. This should help offset the loss of a large client that recently bought a financial institution that performs many of the same services as Broadridge. Ongoing problems in the finance sector are also putting pressure on Broadridge to offer greater incentives for clients who renew their contracts.

The company’s other main division, Clearing and Outsourcing Solutions, accounts for the remaining 5% of its revenue. This business sells securities-clearing, custody and record-keeping services to brokerage firms in the U.S. These help brokerage firms, banks and other financial-services institutions comply with increasingly complex tax and privacy laws.

Tight lending criteria cut credit risk

Broadridge’s clearing division also provides margin loans to brokers. These are backed up by the value of securities in the brokers’accounts, so they expose the company to losses if their value falls. However, Broadridge is highly selective when it extends credit. This helps lower this risk.

Revenue at this division rose 6% in 2009, as new business and higher trading volumes helped offset lower interest income (caused by the drop in interest rates) from its trading accounts.

Broadridge’s strong balance sheet is a plus. Its $324.1-million long-term debt is a low 12% of its market cap. As well, it holds cash of $280.9 million, or $2.02 a share. The company’s $511.1-million of goodwill is a manageable 18% of its total assets.

Big jump in dividend

Broadridge should earn $1.57 a share in fiscal 2010, and the stock trades at just 12.7 times that estimate. Thanks to its improving outlook, Broadridge has doubled its quarterly dividend to $0.14 a share from $0.07. The new annual rate of $0.56 yields 2.8%.

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Opinions and information presented are not guaranteed. Some recommendations are bound to prove disappointing, so it’s essential to balance your holdings across the five main sectors of the economy, and to invest with the long term in mind. For overall portfolio direction, consult a personal financial advisor. Past returns do not guarantee future results.